Whether by accident or design, the federal government and Federal Reserve have joined forces to systematically paralyze the US financial sector. We now have have a czar saying he can take back money that executives have already been paid:

Kenneth Feinberg, the Obama administration’s pay czar, said on Sunday he has broad and “binding” authority over executive compensation, including the ability to “claw back” money already paid, and he is weighing how and whether to use that power.…Feinberg has been consulting with seven companies that have yet to pay back money they borrowed from the government, including Citi, American International Group, Bank of America, Chrysler Financial, Chrysler Group, General Motors and GMAC.

Those companies faced a deadline of Friday of submitted proposals to Feinberg for their top 25 employees.

Feinberg said on Sunday that decisions he makes will be “binding,” but the law limits his power over contracts signed before Feb. 11, 2009.

He also said he has the authority to use a “clawback” provision to go after compensation for executives from any company that received money from the U.S. Treasury’s Troubled Asset Relief Program (TARP).

“I have the discretion, conferred upon by Congress, to attempt to recover compensation that has already been paid to executives not only in these companies, but in any company that received federal assistance,” Feinberg said during his remarks.

Asked by Reuters if he could use that ability to target a firm like Goldman Sachs which paid back $10 billion in bailout money, Feinberg said: “Anything is possible under the law.”

“I can claw back, but we haven’t focused on that at all,” he said.

Pretend for the moment that you are in charge of AIG or Citi or another big financial institution that is teetering on the edge of bankruptcy. If you are to have any chance of coming back from the brink, what do you need? Why, you need very talented people. And how are you supposed to attract and retain those people, when you’re already broke? Why, you can offer them a low base salary, with huge performance bonuses if they do really well.

Now pretend for the moment that you are a really talented financial executive, the kind of person that could actually turn AIG or Citi around. Just how insane would you have to be, to sign a contract with them? Chances are, the firm will sink, and on the off-chance that it doesn’t, you will have Chuck Schumer reading your home address during Congressional hearings so that ACORN knows which house to paintball.

Let’s be clear, I am not defending the bonuses that the TARP firms have been handing out. But my point is, even the 1% chance that these bailouts might work, has been eradicated by appointing a pay czar who will chase away any true talent. AIG and all the rest are now hulking shells propped up by the taxpayer, serving no economic purpose except to crowd out competing mechanisms for allocating capital.

The below chart shows what happened to bank lending to businesses, after Bernanke’s “heroic” injections of reserves. There’s a credit crunch on, all right, courtesy of the Fed.